| |NOVEMBER 20238CIOReviewIN MY OPINIONTHE SCIENCE AND ART OF BALANCE SHEET RISK MANAGEMENTBy Abraham M Izquierdo, Executive Director of Traded and Treasury Risks, Grupo Financiero BanorteFew years ago, I was invited to lecture a selective group of people in a vendor forum at the beautiful Bogota Colombia. The topic of my presentation was dedicated to Asset and Liability Management and the relevance, particularly for a bank's point of view to model and hedge the intrinsic interest rate risk on the balance sheet. By remembering the before mentioned beautiful and grateful experience, the main point is to emphasize the fact that interest rate risk management has represented an ancient and important topic for banks for a long while. Nonetheless, the failure of taking into account the asset and liability practice, more specifically, the interest rate risk management has been "THE DRIVER" associated with the SVB collapse.As this article expresses in the head line, managing the risks on the balance sheet is a complex task. More than hard science, it also has to be with the art of measuring, modelling, and managing the risks associated with liquidity, capital, currency, and interest rate, among others. To capture and describe the complex art-science endeavor behind managing the above-mentioned risks would take more than a few pages. So, in the present dissertation, the focus is going to be interest rate risk, which in order to be properly hedged and managed requires as a minimum, the following items:1. Characterization of the bank's balance sheet The first and most important task when assessing interest rate risk is a proper characterization of the balance sheet. In this regard, knowing, for example, that the balance sheet is mainly comprised of fixed assets (which are vulnerable against the increase in interest rates, but defensive against the decrease in rates), is irrelevant if one does not have the complete picture on which liabilities are funding those assets. So, the first step for measuring interest rate risk is to have the big picture of assets and liabilities in the balance sheet of a bank. Abraham M Izquierdo
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